By Layla Zulfa 
John Zito, co-president of Apollo Global Management’s formidable asset management division and its head of credit, delivered a stark and unvarnished assessment of current valuation practices in the private equity sector, specifically regarding its software holdings. Speaking to clients of investment bank UBS last month in remarks first reported by the Wall Street Journal and subsequently confirmed by CNBC, Zito stated unequivocally that private equity firms are failing to accurately value their software investments in the wake of a significant downturn in comparable public technology companies and the accelerating impact of artificial intelligence. "I literally think all the marks are wrong," Zito told the assembled clients. "I think private equity marks are wrong."
Zito’s candid comments resonate deeply within an industry grappling with mounting pressures from several fronts, primarily the dramatic repricing of public software stocks and the emergent threat of AI-driven obsolescence. His remarks, coming from a senior executive at one of the world’s largest alternative asset managers, represent a rare internal acknowledgment of market vulnerabilities that many industry leaders have, until now, sought to downplay.
The Genesis of Discrepancy: Public Market Plunge Meets Private Valuations
The valuation crisis in private equity software holdings is intrinsically linked to the recent turbulence in public technology markets. Over the past year, and particularly in recent months, investors have aggressively sold off shares of public software companies. This sell-off is fueled by a confluence of factors, including rising interest rates, inflationary pressures, and a growing apprehension that generative AI tools from innovators like Anthropic and OpenAI could fundamentally disrupt, if not entirely render obsolete, many traditional software business models. The Nasdaq Composite, a bellwether for technology stocks, experienced a significant correction from its highs, and while it has shown some recovery, many individual software firms have seen their market capitalizations slashed by substantial percentages. For instance, many enterprise software companies, once commanding premium multiples based on recurring revenue and growth prospects, have seen their forward revenue multiples contract sharply from double-digits to mid-single digits or even lower.
Private equity firms, which often rely on comparable public company valuations ("comps") to mark their privately held portfolio companies, have faced a growing dilemma. Unlike public markets, where prices are determined daily by open trading, private valuations are typically updated quarterly or semi-annually and involve a degree of subjective judgment. Zito’s assertion suggests that these private valuations have not kept pace with the dramatic repricing seen in public markets, creating a significant disconnect. This lag can inflate reported asset values, obscure potential losses, and present an overly optimistic picture to limited partners (LPs) who have invested in these funds.
Private Credit Under Siege: A Domino Effect
The issues in private equity valuations have a direct and profound impact on the burgeoning private credit market. Private credit, an asset class that has exploded in popularity over the last decade, primarily involves non-bank lenders providing financing to companies, often those acquired by private equity firms. These loans are typically secured by the assets and cash flows of the portfolio companies. If the underlying equity valuations are inflated, the associated private credit loans, which are often structured based on these valuations, may also be mispriced or carry greater risk than perceived.
For weeks, concerns have mounted that private credit lenders are sitting on stale valuations of their software loans. This apprehension has ignited a wave of redemptions, as investors, particularly retail investors, seek to withdraw funds from private credit vehicles. Data from the Financial Times revealed that retail investors alone pulled approximately $10 billion from private credit funds in the first quarter of the year. This retail stampede highlights a crucial vulnerability: while institutional investors might have longer lock-up periods and a deeper understanding of illiquidity, retail investors, drawn by promises of stable, high yields, can react more swiftly to negative news or perceived risks.
Amid this growing unrest, several prominent figures within the private credit industry, including executives from firms like Blackstone and Blue Owl Capital, have actively sought to calm markets. Their consistent message has been that while public market volatility is undeniable, the underlying companies financed by private credit are largely performing well, demonstrating robust operational metrics and strong cash flows, thereby insulating the credit performance from equity market fluctuations. However, Zito’s statements directly challenge this narrative, suggesting that the "underlying companies" in the software sector may not be as insulated as portrayed, particularly if their business models are fundamentally threatened.
Adding weight to Zito’s concerns, sophisticated players in traditional finance are already acting. JPMorgan Chase, one of the world’s largest banks, has reportedly begun reining in its lending to private credit players and has notably marked down the value of some software loans on its books. This move by a major institutional lender underscores the growing recognition of risk within this specific segment of the private markets.
The AI Tsunami: Reshaping the Software Landscape
The core driver of the public market repricing, and consequently Zito’s concerns, is the rapid advancement of artificial intelligence, particularly generative AI. Companies like OpenAI with its ChatGPT, and Anthropic with Claude, have demonstrated AI’s transformative power, capable of automating tasks previously performed by complex software, generating content, and even writing code. This paradigm shift raises existential questions for many incumbent software providers.
For example, traditional customer relationship management (CRM) software, project management tools, or even certain cybersecurity solutions could face immense pressure from AI-powered alternatives that offer superior efficiency, lower cost, or more intuitive user experiences. An AI model capable of autonomously managing customer inquiries, drafting marketing copy, or even detecting complex network anomalies could erode the value proposition of established software vendors. This potential for disruption is not merely incremental; it threatens to fundamentally alter competitive landscapes and diminish the long-term viability of companies that fail to adapt rapidly.
A Look Back: The 2018-2022 Boom and Its Legacy
Zito particularly singled out software companies acquired by private equity firms between 2018 and 2022 as being especially vulnerable. This period was characterized by exceptionally high valuations, fueled by historically low interest rates and an abundance of readily available capital. Private equity firms, flush with cash from eager limited partners, engaged in aggressive bidding wars, driving up acquisition multiples to unprecedented levels. Many of these deals were heavily leveraged, with private credit funds providing a significant portion of the financing.
During this era, the pursuit of growth often overshadowed profitability, and some of the acquired software firms, Zito warned, were "lower quality" than their larger, more established public competitors. These companies might have niche products, less defensible market positions, or business models that are inherently more susceptible to technological disruption. With interest rates now significantly higher, the cost of servicing the debt taken on during those boom years has soared, placing additional strain on companies that may already be struggling with reduced growth prospects and competitive threats from AI. This confluence of high leverage, inflated entry valuations, and a deteriorating market environment creates a precarious situation for both the equity owners and the credit providers.
Apollo’s Position: Differentiating from the Pack
Despite Zito’s stark pronouncements, Apollo Global Management has actively sought to differentiate its own exposure and strategy within the private credit landscape. An Apollo spokesman declined to comment directly on Zito’s remarks, but the firm has publicly articulated its cautious approach. During recent analyst calls, Apollo executives emphasized that the vast majority of its loans are extended to larger, more stable companies, many of which are rated investment grade. Furthermore, the firm has stated that software comprises less than 2% of its total assets under management. Crucially, Apollo claims to have zero direct exposure to private equity equity stakes in software firms, meaning its credit exposure is not intertwined with the most speculative part of the market Zito criticized.
This strategic positioning is designed to reassure investors that while Zito acknowledges systemic weaknesses, Apollo itself is insulated from the worst potential fallout. The firm’s focus on larger, more resilient borrowers with stronger credit profiles suggests a deliberate strategy to mitigate risks associated with the more volatile segments of the private markets.
The Broader Impact and Potential Losses
Zito’s analysis extends beyond mere valuation discrepancies to project tangible losses for private credit lenders. He warned that if these software companies, particularly those in the "wrong place" in terms of adapting to the new AI-led regime, face distress or default, lenders could realistically recoup "somewhere between 20 and 40 cents" on the dollar. Such recovery rates represent deep losses for credit investors, a scenario typically associated with severe defaults rather than minor adjustments.
This grim forecast for specific segments of the market stands in contrast to the overall resilience Zito expects for the broader private credit asset class. He clarified that while certain specialized lenders who "focused heavily on the software sector" are heading for trouble, the entire market is not doomed. His concluding remark, "If you do stupid things and you do concentrated things, and you do things that you’re not supposed to do in your vehicle, you probably will have a bad ending," serves as a pointed warning against excessive risk-taking, lack of diversification, and poor underwriting standards.
The implications of Zito’s assessment are far-reaching. For private equity firms, it signals a period of reckoning, potentially involving significant write-downs of portfolio company values, slower exit opportunities, and increased pressure on fundraising efforts as LPs become more discerning. For private credit lenders, particularly those with concentrated exposure to software, it portends a challenging period of loan restructurings, potential defaults, and heightened scrutiny from their own investors. The era of easy money and ever-increasing valuations in private markets appears to be drawing to a close, replaced by an environment demanding greater diligence, realistic valuations, and a clear understanding of technological disruption. The private markets, once seen as an opaque but consistently rewarding frontier, are now facing their most significant test in years, forcing a fundamental re-evaluation of risk and return.
